“Under competition, workers are paid what they are worth.” Explain and evaluate this statement. Does it follow that the resulting distribution of wage incomes is desirable?

Question

What will be an ideal response?

Answer 1

If one believes that workers are “worth” their marginal revenue product, then this would be a true statement in competitive markets. Firms would behave in a profit-maximizing manner and would hire workers as long as the wage did not exceed the marginal revenue product of the last worker hired. Beyond this point, the firm would add more to its costs than to its revenues and would not pay a worker more than the worker was worth in terms of the worker’s contribution to the firm’s revenues. The firm would not pay less than this amount because competing firms would benefit by hiring the worker away.
It does not follow that the resulting distribution of wages is desirable. First, it is unlikely that there are many markets that fit the model, so the marginal productivity theory is only an approximation of reality. Second, the ability of some workers to contribute to production may be severely limited because of some handicap and the worker may not be able to earn enough income to live on if income were limited to the worker’s worth. Others may earn far more than is necessary for survival and to achieve an affluent lifestyle and redistribution of some of this income may be desirable. Finally, much of the value of the marginal revenue product depends on the initial distribution of income, which in turn determines the demand for various products. If this initial distribution of income is undesirable, the value of the marginal revenue product of many workers may not be “desirable” from the society’s view.